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A company we have followed closely for two years is Palomar Medical Technologies (NASDAQ:PMTI). The stock has risen impressively in this period from $24 to a high of over $55 before falling back during the week ending February 9, 2007 after announcing the 4Q and full year earnings for 2006.

The company is a medical equipment and appliance manufacturer engaging in the research, development, manufacture, marketing, sale, and distribution of light-based products for medical and cosmetic treatments. It is based in Massachusetts. Principal customers are dermatologists or other professionals in the skin care industry. It is the undoubted leader in this field and it has won a number of patent disputes with competitors in recent months. Royalties will be an additional source of revenue going forward from these competitors.

Although it has a high valuation at present and will probably be fully valued at $55 the recent drop in price is overdone and PMTI is now a buying opportunity. The revenues have been growing at a constant rate over the past two years and 2006 was no exception. We thought that 4Q would begin to show flattening revenues but it did not happen and revenues for 4Q and the whole of 2006 were higher than we expected. One of the investor issues is sorting out the financial statements and understanding the core business from these statements especially with the back royalty payments made in 2006 after patent victories. In addition, the use of non- cash NOL’s in this period to reduce tax liability has made predicting the bottom line difficult. This is made more difficult as the company does not give future guidance!

However, assuming a steady stream of royalty payments going forward and a flattening sales curve of existing products a $55 price is very achievable in the short term and if sales continue to grow at the rate of 2006, probably unlikely but still possible, the price could reach $60 by the year end. One of the major movers of this stock will be the deals it has with Proctor and Gamble and Johnson & Johnson to supply consumer based products to the market. A major milestone was reached with the 510K approval recently of the first such product. Information from these strategic collaborations are major catalysts for the stock in 2007 along with quarterly earnings releases.

The company has informed me in the past that they do not need to use the public markets to access capital and are fully self funded from revenues. With recent awards and robust sales the company now has very rich resources for a company its size. Management has executed well against goals, the international market still needs to be exploited, the manufacturing organization is efficient and the relationships with the two large consumer products companies very attractive. Even though the fundamentals are strong the high valuation has attracted a large short interest and increasing volatility especially at the $55 price.

PMTI 1-yr chart
PMTI

Disclosure: Author has no position in PMTI.

Source: Eye on Palomar Medical Technologies